Congress v. AJC, 1st Cir. (1994)
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Transcript of Congress v. AJC, 1st Cir. (1994)
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USCA1 Opinion
UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT ____________________
No. 94-1766
CONGRESS CREDIT CORPORATION,
Plaintiff, Appellant,
v.
AJC INTERNATIONAL, INC., ET AL.,
Defendants, Appellees.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Hector M. Laffitte, U.S. District Judge] ___________________
____________________
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Before
Campbell, Senior Circuit Judge, ____________________
Boyle* and Fust ,** District Judges. _______________
______________________
Ronald L. Rosenbaum, with whom Woods, Rosenbaum, Lucke _____________________ _______________________
Perez Gonzalez was on brief for appellant. ______________
Brian K. Tester, with whom Richard A. Lee Law Office was o________________ _________________________
for appellees.
____________________
December 15, 1994
____________________
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____________________
*Of the District of Rhode Island, sitting by designation.
**Of the District of Puerto Rico, sitting by designation.
CAMPBELL, Senior Circuit Judge. Congress Cre _____________________
Corporation ("Congress Credit") appeals from the distri
court's dismissal without prejudice of its diversity acti
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to collect certain proceeds in the hands of the appellee
AJC International, Inc. ("AJC") and Fronex Commodities, In
(Fronex") under a perfected factor's lien. The lien
allegedly granted to Congress Credit by United Western
Puerto Rico, Inc. ("United Western"), which later filed f
bankruptcy. The district court has dismissed the lien acti
without prejudice, apparently believing that Congress Cre
should not presently proceed with its lien action due to t
pendency of several adversary proceedings brought in t
bankruptcy court by the trustee of United Western to reco
the same sums as preferences from these same defendant
This court initially affirmed, but upon considering Congre
Credit's petition for rehearing, and after giving the matt
further thought, has vacated its opinion and judgment
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affirmance. We now hold that the district court was witho
authority to dismiss Congress Credit's diversity action
enforce its lien, and we vacate and remand for furt
proceedings in the district court.
FACTUAL AND PROCEDURAL BACKGROUND FACTUAL AND PROCEDURAL BACKGROUND
Congress Credit is a commercial finance compan
It financed the accounts receivable and inventory of Unit
Western and claims to hold a recorded Factor's Lien a
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Assignment of Accounts Receivable given by United Weste
pursuant to the Puerto Rico Factors Lien and Assignment
Accounts Receivable Acts.1 On March 2, 1990, United Weste
filed a petition in bankruptcy under Chapter 11 of t
Bankruptcy Code, which was converted to Chapter 7
September 7, 1990.
Appellees were suppliers of United Western,
allegedly, within the ninety days prior to the bankrupt
filing, received bulk transfers of inventory from Unit
Western in payment of its outstanding indebtedness to them
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$376,610.79 in the case of AJC and $81,178.60 in the case
Fronex.2 On May 11, 1990, United Western commenc
adversary proceedings in the bankruptcy court against t
appellees, alleging that the inventory sales constitut
preferential transfers. After the conversion to Chapter
the trustee was substituted for the debtor as plaintif
Congress Credit commenced this action in the district cou
under diversity jurisdiction to recover essentially the sa
____________________
1. P.R. Laws Ann. tit. 10, 551-60, 581-88 (1976). T
status and validity of this lien is not presently before u
although it plays a central role in the controversy.
2. Two other suppliers of United Western also allege
received bulk transfers within the ninety day preferen
period, in the amounts of $180,504.84 in the case of A
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International ("Agro") (originally a named defendant in t
suit) and $23,000.00 in the case of Top Flight, Inc. ("T
Flight"). Congress Credit represents that both of the
entities have been liquidated while this litigation has be
pending.
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assets, or their proceeds, on June 1, 1990, alleging that t
merchandise thus transferred had been subject to its factor
lien.
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On June 7, 1990 (some six days after filing i
lien action in the district court) Congress Credit filed
adversary proceeding in the bankruptcy court, assertin
claim to any recovery the estate might obtain in t
preference actions. The trustee did not contest t
proceeding; accordingly, judgment was entered on February 1
1992 in favor of Congress Credit, securing Congress Credit
right to any such recovery.
The appellees having successfully obtained a st
of the lien action on August 31, 1990, pending resolution
the adversary proceedings in the bankruptcy court, Congre
Credit next moved the district court to lift that stay
August 27, 1992. The appellees opposed that motion and mo
to dismiss on September 28, 1992. The district court deni
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the motion to vacate the stay and granted the motion
dismiss in an opinion and order dated April 16, 199
Congress Credit's unsuccessful motion for reconsideration
denied in a second opinion and order dated June 8, 199
which reiterated the grounds stated in the first opinio
Congress Credit then appealed.
Congress Credit represents that there are no fun
in United Western's estate and that the bankrupt's busine
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has long since been liquidated.3 The record also shows t
the bankruptcy judge has rejected a proposed agreement f
Congress Credit to finance the trustee's preference actio
and has ordered the trustee to show cause why the preferen
actions should not be dismissed, as none of the procee
would benefit the estate (i.e. they would presumably all
to Congress Credit under the bankruptcy court's order
February 11, 1992).
The district court, nonetheless, reasoned t
Congress Credit's interests were fully protected by and cou
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await the results of the trustee's preference actions. T
court seemed to base the dismissal of the lien action on i
understanding that it was merely duplicative of the pendi
preference actions:
The trustee's adversary proceeding and
this case involve the same transactions,
property and parties. The only
difference between the cases lies in the
legal bases for challenging the validity
of the transfers. A judgment in the
civil action would most certainly have an
effect on the debtor's estate. . . .
[M]aintenance of two proceedings
____________________
3. Not having the record in the bankruptcy case before u
we cannot know for certain that this is correct. If it i
and if, as may be the case, infra, the preference acti _____
cannot benefit the estate, there may be no point in havi
the trustee seek to recover property all of which must
turned over to Congress Credit, with the inflation of le
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fees that this might entail. On the other hand, there may
legitimate reasons justifying continuance of the preferen
actions. Sorting out and making the best provision for the
realities is something we leave to the district court
remand.
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adjudicating the same issues consumes
scarce judicial resources.
ANALYSIS
ANALYSIS
Shortly after hearing this appeal, we summari
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affirmed the district court's judgment of dismissal as,
first blush, it seemed sensible to permit matters to
pursued and, if possible, concluded in the bankruptcy cour
Like the district court, we were unhappy at the prospect
the two cases the preference actions and the lien acti
wasting scarce resources by proceeding on separate trac
in different courts, with the risk of multiple judgments.
are now persuaded, however, that the district court
proposed solution to this dilemma was legally insupportabl
The correct, as well as most efficient solution, is for bo
proceedings to be consolidated for disposition in t
district court, which is the only court with cle
jurisdiction over both.
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While the lien action and the preference actio
apparently involve the identical property, they are not o
and the same action, permitting dismissal of one as surpl
to the other. They do not involve the same parties nor t
same causes of action. The law suit from which this appe
is taken the lien action is a diversity action
enforce a lien created under Puerto Rico law. P.R. Laws An
tit. 10, 551-60, 581-88 (1976). Congress Credit mu
prove the existence and validity of the lien, and,
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addition, that the lien attached to the inventory transferr
to the appellees and followed to any claimed proceeds now
their hands. The trustee, on the other hand, must sho
inter alia, that the inventory was property of the esta __________
when transferred to appellees so that its transfer to t
was a preference. 11 U.S.C. 547(b) (1988) ("the trust
may avoid any transfer of an interest of the debtor___________________________
property") (emphasis added); see generally 4 Collier_____________ ________
Bankruptcy, 547.01 (Lawrence P. King, ed. 1994) (discussi __________
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elements of a preference claim). This may requi
consideration of the extent to which Congress Credit
asserted lien removed the inventory from the debtor
property and made it instead the property of Congress Cre
prior to the filing of United Western's bankrupt
petition.4 Thus, the legal operation and validity of t
lien is an issue of some importance to both cases. Howeve
the plaintiffs and the legal theories for recovery in ea
case are different.
The district court apparently viewed the two cas
as based on identical, parallel theories, giving the earli
____________________
4. The operation of the lien is a question of Puerto Ri
law. See 4 Collier on Bankruptcy, 541.02[1] (Lawrence___ _____________________
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King, ed. 1994) ("Section 541 provides that the commenceme
of a case creates an estate consisting, most importantly,
all legal or equitable interests of the debtor in property
the time of the commencement of the case. Under t
provision it will still be necessary to look to nonbankrupt
law, usually to state law, to determine whether the debt
has any legal or equitable interest in any particular item.
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preference cases a right to proceed exclusive of t
subsequent lien action. This analysis overlooked the maj
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differences between the two causes of action. A distri
court may certainly dismiss an action which is mere
"duplicative" of another action pending in another feder
court. See Colorado River Water Conservation Dist. v. Unit ___ _______________________________________ ___
States, 424 U.S. 800, 817, 96 S.Ct. 1236, 47 L.Ed.2d 4 ______
(1976); Small v. Wageman, 291 F.2d 734, 735 (1st Cir. 1961 _____ _______
17A Charles Alan Wright et al., Federal Practice a
Procedure 4247 nn. 7-8 and accompanying text (2nd e
1988). But for an action to be "duplicative" of another,
as to warrant its dismissal for that reason alone, the o
must be materially on all fours with the other. The prese
lien action is not at all in that category. The plaintiff
the lien action is different from that in the preferen
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actions, and the theory of recovery is altogether differen
See, e.g., Thermal Dynamics Corp. v. Union Carbide Corp., 2 _________ ______________________ ___________________
F. Supp. 773, 774 (S.D.N.Y. 1963) (in order to proper
enjoin suit in another court, the issues "must have such
identity that a determination in one action leaves little
nothing to be determined in the other"); Radio Corp.____________
America v. Rauland Corp., 16 F.R.D. 160, 163 (N.D. Ill. 195 _______ _____________
(federal court should not stay proceedings in its o
jurisdiction unless it appears that parties and issues a
the same), mandamus denied, 217 F.2d 218 (7th Cir. 1954 _______________
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cert. denied, 348 U.S. 973, 75 S.Ct. 533, 99 L.Ed. 7 _____________
(1955), mandamus denied, 348 U.S. 968, 75 S.Ct. 543, 99 L.E _______________
754 (1955).
We think it clear, therefore, that there is
justification for dismissing the present lien action on t
basis of a supposed identity between it and the preferen
actions. Nor can we see any bankruptcy-related theo
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allowing the district court to force Congress Credit
depend upon the preference proceedings in the bankrupt
court for the collection of its lien. We are advised t
the automatic stay as to Congress Credit has long since be
vacated. See 11 U.S.C. 362(a) (1988) (staying actio ___
against the debtor, property of the debtor, or property
the estate). Direct enforcement of Congress Credit's li
must be accomplished by a state law action brought in t
Puerto Rico courts or a federal court sitting in diversit
It is doubtful whether a bankruptcy court has jurisdiction
all over such a lien action, which is clearly not a co
bankruptcy matter, see 28 U.S.C. 157(b) (1988 ___
Conceivably, in proper circumstances, a bankruptcy cou
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might handle a lien enforcement action as a non-core b
"related" proceeding under the eye of the district cour
which would have final say over its disposition. 28 U.S.C.
157(c) (1988) (bankruptcy court may hear a non-co
proceeding, but final disposition of such must be by t
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district court). Most probably, although we do not rule
the question, the lien action is not even a "relate
proceeding. The lien holder here claims, and has be
awarded by order of the bankruptcy court, the right to a
recovery in the preference actions. This suggests that,
now, the result in the lien proceeding can have no impa
whatever upon the bankruptcy estate. See, e.g., In re Nor _________ ________
Star Contracting Corp., 146 B.R. 514, 519 (Bankr. S.D.N. _______________________
1992) (action is "related to" a bankruptcy if outcome cou
alter the debtor's rights, liabilities, options, or free
of action, or in any way impacts upon the handling a
administration of the bankruptcy estate); In re Chambers, 1
______________
B.R. 788, 793 (Bankr. W.D. Mo. 1991) (matter not "related t
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Title 11 where neither amount of property available f
distribution, not the allocation of property among creditor
is affected by the dispute). If the lien enforcement acti
is not a "related" proceeding, the bankruptcy court wou
lack any jurisdiction whatever over it. In any event, it
difficult to justify ousting Congress Credit, e
temporarily, from the district court which clearly
diversity jurisdiction over its lien action leaving i
rights under the lien to be secured in the more round abo
preference proceeding, requiring proof of addition
elements, in a court probably lacking any jurisdiction
enforce the lien claim directly.
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In these circumstances, we think it was erroneo
to defer to the trustee's and the bankruptcy court's lead
the preference proceedings proceedings which, at bes
seem poorly tailored to Congress Credit's present needs, a
which in any case seem to have lost steam. To be sure,
makes no sense for the two actions to proceed along separa
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tracks, inviting a defense strategy of divide and conque
But there is a better solution to this problem, namely,
consolidate both proceedings in the one court, here t
district court, where jurisdiction over both actions plain
exists. This will enable attention to be directed where
should have been directed all along to the merits
demerits of the claims against the appellees, without t
distraction of conceivable double or conflicting recoveri
in different courts.
We, therefore, vacate and remand to the distri
court with instructions that it provide appropriate notice
the trustee in bankruptcy, directing him to show cause in t
district court why the preference claims should not
brought up to the district court from the bankruptcy cou
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and either abandoned or dismissed or else continued
consolidation with the lien claim.5 The district court c
____________________
5. The bankruptcy court has already instituted inquiry in
whether the preference claims should be continued now that
is clear that the sole beneficiary will be Congress Credi
The district court may, but need not, allow that inquiry
be resolved by the bankruptcy judge if it thinks this is t
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either dismiss the preference claims if it determines t
they lack viability (assuming the bankruptcy court has n
done so, see n.5) or allow the trustee to pursue them in___
consolidated proceeding in the district court together wi
the lien diversity action.
The power of the district court to consolidate t
preference actions now pending in the bankruptcy court wi
the instant diversity lien action rests on its power
withdraw a case from the bankruptcy court "for cause shown
28 U.S.C. 157(d) (1988). Courts have done this whe
necessary in analogous instances. See, e.g., In re Sev _________ __________
Inc., 143 B.R. 114, 117 (N.D. Ill. 1992) (considerations____
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judicial economy adequate to meet "cause shown" requirement
Enviro-Scope Corp. v. Westinghouse Elec. Corp. (In re Envir __________________ ________________________ ___________
Scope Corp.), 57 B.R. 1005, 1008-09 (E.D. Pa. 1985) (same _____________
We direct use of 157(d) not because of any fault on t
part of the bankruptcy court, but because bringing t
preference claims into the district court will allow a
facets of these controversies affecting the same property a
____________________
most efficient way to proceed. Alternatively, the distri
court may take charge of and resolve that inquiry itsel
Given the nearly four years of wheelspinning, we direct t
district court to do whatever is necessary to speedi
resolve, or have resolved, the status of the preferen
proceedings so that appellant's lien claim, either alone
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in tandem, can move ahead and be decided without furt
delay.
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the same defendants to be disposed of by one tribunal havi
undoubted jurisdiction and authority.
We emphasize that the question of whether there
any reason to continue the preference claims should
speedily resolved at the outset. To pursue them at t
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expense of the estate and, potentially, of the appellant
recovery, may be inadvisable and a waste of money. On t
other hand, we do not want to prejudge the matter. If t
preference claims still serve a proper purpose and should
pursued, they should be pursued in the district court in
consolidated proceeding together with the lien claim. We a
confident that the district court, having both matters befo
it, will give expedited attention to ending the existi
gridlock. Congress Credit is entitled to have the merits
its claims determined without further delay.
The district court's judgment of April 19, 199
and its opinion and order of June 8, 1994, are vacated, a
this case is remanded to the district court for proceedin
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consistent with this opinion.6
____________________
6. We treat the district court's opinion and order of Ju
8, 1994 as an appealable final judgment. See Bankers Tru ___ __________
Co. v. Mallis, 435 U.S. 381, 98 S.Ct. 1117, 55 L.Ed.2d 3 ___ ______
(1978).
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